Finance Assignment Help With Accounting For Lessors

Example (Accounting for lessors)

A firm manufactures and then leases a photocopier; the annual minimum lease payments (MLPs) are $20,000 at the end of each year for three years. The cost of manufacture is $40,000. At the end of the lease the unguaranteed residual value is $10,000. The discount rate used is 8%.

If the lease is treated as a sales-type capital lease the lessor'sfinancial reporting at the beginning of the lease agreement will be as follows.

Gross investment in lease

Amount

MLPs of $20,000 x 3

$60,000

Residual value

$10,000

$70,000

Net investment in lease

Present value of MLPs

$51,542

Present value of residual value

$7,938

$59,480

Unearned income

$10,520

At inception, in financial statements

Sales revenue

$51,542

COGS

$32,062

Gross profit on sale

$19,480

Gross investment in lease

$70,000

less unearned income

$10,520

Net investment in lease

$59,480

Thereafter the lease payments received of $20,000 a year are divided between interest income (8% of the net investment) and a reduction in investment.

The interest payment is cash flow from operations and the reduction in investment is an investing cash flow.

If a lease is accounted for as an operating lease then:

The assets will continue to be reported on the lessor's balance sheet, they will be depreciated as usual (with a cost of $40,000, salvage value of $10,000).

The lease payments will be rental income and be allocated to operating cash flow.

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